IMF Approves EFF and CCFF Credits for Jordan

The International Monetary Fund (IMF) has approved credits totaling SDR 161.98 million (about US$220 million) for Jordan in support of the nation’s economic adjustment and structural reform program for the period 1999-2001, and to help offset the impact of a temporary shortfall in exports of goods and services. Of the total, SDR 127.88 million (about US$174 million) is available under a three-year Extended Fund Facility (EFF) credit1 and SDR 34.1 million (about US$46 million) is being provided under the IMF’s Compensatory and Contingency Financing Facility (CCFF).2 Jordan will have immediate access to credits amounting to SDR 44.8 million (about US$61 million), including the amount of SDR 34.1 million from the CCFF.3

Background

Economic performance during 1996-98 fell short of goals targeted under Jordan’s previous EFF-supported program (see Press Releases Nos. 97/8 and 96/4). While the program was successful in maintaining low inflation and building up official foreign exchange reserves, real GDP growth slowed to an annual average of about 1 percent in 1996-98, partly because of constraints on exports to neighboring countries and the end of the post-Gulf war construction boom. Also, the fiscal deficit had widened to about 10 percent of GDP by 1998, instead of being reduced as envisaged in the program, partly reflecting the slowdown in economic activity. Important structural reforms were undertaken—especially through 1997—in financial market development, trade liberalization, and tax reform. However, the pace of structural reform slackened toward the end of the program period. Domestic and regional political uncertainties, combined with the large fiscal deficit, also put pressure on foreign exchange reserves in 1998, and briefly in early 1999, but reserves have since begun to strengthen.

Medium-Term Strategy and the 1999 Program

The three-year EFF-supported program is designed to promote a gradual recovery in the growth rate of real GDP to 3-4 percent, the maintenance of Jordan’s low inflation rate, and a substantial strengthening in official foreign exchange reserves. The mining sector and non-traditional export activities are expected to lead the growth process, although construction and agriculture should also contribute. These medium-term macroeconomic objectives will be pursued through fiscal consolidation, a continued prudent monetary policy consistent with the stability of the dinar, and wide-ranging structural reforms. The overall fiscal deficit will be reduced to 4.0 percent of GDP (1.4 percent of GDP after grant) by 2001, which will lead to asignificant reduction in the ratio of public debt to GDP. The structural reform agenda emphasizes the areas of taxes, social security, financial sector, trade, and public enterprise reform and privatization. The authorities envisage a reduction in the role of the public sector in the economy which, in addition to privatization, would be supported by a rationalization of public expenditure. The government will continue the efforts started last year to protect the more vulnerable social groups and promote employment generation, in particular through the Social Productivity Program.

The 1999 program aims to stabilize the Jordanian economy and set the stage for sustained recovery over the next two years. A modest improvement in the growth rate is targeted while inflation is to remain low and official foreign exchange reserves would begin a steady recovery. The budget deficit will be reduced to 7.0 percent of GDP, and the overall fiscal deficit to 7.9 percent of GDP; after grants, the overall fiscal deficit is targeted at 4.2 percent of GDP. Monetary policy would seek to support the current exchange rate peg and help bolster international reserves. The external current account deficit is projected to rise slightly in 1999, mainly reflecting some increase in imports linked to the recovery in real GDP growth.

Structural Reforms

During 1999, the authorities would intensify implementation of the structural reform agenda. In the fiscal area, income tax reforms will be introduced, and preparations will be made for the adoption of a Value Added Tax. In the financial sector, a new banking law will enhance bank regulation and supervision, and a deposit insurance scheme will be put in place. The authorities will also initiate regular auctions of government securities, which will promote financial market development. In the trade area, the maximum tariff rate will be lowered in two steps, from 40 percent currently to 30 percent by early 2000. The public enterprise reform and privatization program will pick up speed as significant steps are being taken to improvement the management of the Water Authority of Jordan, restructure and privatize the Royal Jordanian airline and the National Electric Power Company, and to develop a privatization strategy for the Jordan Telecommunications Corporation.

The Challenge Ahead

Over the program period, Jordan is expected to continue to face a difficult external environment, not only because of the regional political situation, but also because of the effect of low world oil prices on trading partners in the region. Jordan will therefore continue to require external financial support given its heavy debt burden. Accordingly, the program envisions significant external financial support, including new official debt relief from Paris Club creditors.

Jordan joined the IMF on August 29, 1952, and its quota4 is SDR 170.5 million (about US$231 million). Its outstanding use of IMF credit currently totals SDR 330 million (about US$448 million).

1The EFF is an IMF financing facility that supports medium-term programs that seek to overcome balance of payments difficulties stemming from macroeconomic imbalances andstructural problems. The repayment terms are 10 years with a 4.5-year grace period on principal payments.

2The CCFF assists IMF members experiencing temporary shortfalls in export earnings. The loans are repayable between 3.5 and 5 years, and carry a standard annual interest charge, which is currently 3.52 percent.

3Jordan joined the IMF on August 29, 1952, and its quota [A member ’s quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.] is SDR 170.5 million (about US$231 million). Its outstanding use of IMF credit currently totals SDR 330 million (about US$448 million).

4 A member’s quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.